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Nonlinear Relationship between Financial Development and Economic Growth: Evidence from Post Global Financial Crisis Panel Data

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  • Abdul Bahri, Elya Nabila

    (Fakulti Ekonomi dan Pengurusan Universiti Kebangsaan Malaysia 43600 UKM Bangi Selangor MALAYSIA Faculty of Accounting and Management Universiti Tunku Abdul Rahman UTAR Sungai Long Campus Jalan Sungai Long 9 43000 Kajang Selangor)

  • Mohd Nor, Abu Hassan Shaari

    (Fakulti Ekonomi dan Pengurusan Universiti Kebangsaan Malaysia 43600 UKM Bangi Selangor MALAYSIA)

  • Sarmidi, Tamat

    (Fakulti Ekonomi dan Pengurusan Universiti Kebangsaan Malaysia 43600 UKM Bangi Selangor MALAYSIA)

  • Haji Mohd Nor, Nor Hakimah

    (Faculty of Management and Muamalah Kolej Universiti Islam Antarabangsa Selangor (KUIS) Bandar Seri Putra 43000 Kajang Selangor MALAYSIA)

Abstract

Existing studies find that the nonlinear relationship between financial development and economic growth is inverted U-shaped or there exist Kuznets curve, where financial development harm growth after surpassed the threshold point. The objective of this study is to re-estimate the existing relationship between financial development and economic growth for 65 developing countries for the period post 2007-2008 Global Financial Crisis starts from 2009-2015 using Generalized Method-of-Moment (GMM). Three financial development indicators namely, domestic credit to private sector (DCPS), liquid liabilities (LL) and private credit to deposit money (PCDM) are used in this study. However, our findings are contrary to the previous study. Interestingly, our result shows that the nonlinear relationship between financial development and economic growth is U-shaped for all indicators. In other words, financial development accelerated economic growth after reaching the turning point. The results of U-test of Lind and Mehlum (2010) confirms that the U-shaped relationship exist. It shows that the higher financial development enhance the performance of economic growth. Thus, our results challenge the previous findings and recommend for policy review.

Suggested Citation

  • Abdul Bahri, Elya Nabila & Mohd Nor, Abu Hassan Shaari & Sarmidi, Tamat & Haji Mohd Nor, Nor Hakimah, 2018. "Nonlinear Relationship between Financial Development and Economic Growth: Evidence from Post Global Financial Crisis Panel Data," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 52(1), pages 15-30.
    • Handle: RePEc:ukm:jlekon:v:52:y:2018:i:1:p:15-30
    DOI: http://dx.doi.org/10.17576/JEM-2018-5201-2
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